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TMI Blog2012 (4) TMI 189X X X X Extracts X X X X X X X X Extracts X X X X ..... shed background facts in brief that the assessee-company is based in Singapore and it has no presence in India. Its income consists of receipts from licensing of software to four customers in India. One of the customers is CSC India Pvt. Ltd., which is its hundred per cent subsidiary company. Other three customers are unrelated to the assessee. Two main questions arise in the appeal-(i) whether, the royalty/ Fees for Technical Services ('FTS' for short) is to be taxed on the basis of the gross amount, and (ii) whether, reimbursement of certain expenses are to be included in the receipts for the purpose of the levy of tax? There are other minor ground regarding chargeability of interest u/s 234B, liability to pay surcharge and reconciliation of the receipts. 2.1 Coming to facts, it is submitted that SAP software is internally used by all the group companies. This software is procured from an unrelated party. The expenditure incurred for the use of the license by the group companies is shared by them on the basis of the extent of user. The whole of the payment is made by the head office. This expenditure pertains to the business of the group companies including the Indian subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation Ground 1-SAP License maintenance charges 2 SIC0608031 25.08.2006 3904 175,479 Sl.-43 Reimbursement of expense Ground 1-Travel expense reimbursements 3 2006/10-475 27.10.2006 98 4,458 -do- Ground 1-Travel expenses reimbursement 4 2006/11-295 22.11.2006 116 5,218 -do- Ground 1-RAS charges reimbursement 5 SIC0701028 23.1.2007 16328 695,427 -do- Ground 1-Travel expense reimbursements 6 SIC0703003W 16.3.2007 7448 197,756 -do- Ground 1-Travel expense reimbursements Ground 1 total 1,507,046 7 SIC0604012 26.4.2006 2249 100,902 -do- Ground 2-Travel expense reimbursements 8 SIC0605035 26.5.2006 4319 194,738 -do- Ground 2-Travel expense reimbursements Ground 2 Total 295,640 9 SIC0604024 TDS amount 28.4.2006 46,223 208,401 Sl. No. 3 Technical services provided Ground 3-Labour cross charge Ground 3 Total 208,401 10 SIC0606015 26.6.2006 Refer remarks 41,369 Sl. No. 1-part of sale of software Ground 4-Difference between the amount as per Form 3CEB issued by CSC India and amount as per TDS certificate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 295640 9 SIC0604024 28.04.2006 46223 2084017 Ground 3 Total 2084017 10 SIC0606015 26.06.2006 Refer remarks 41369 Total 41369 Grand Total 3928072 2.8 The case of the ld. counsel is that royalty/FTS are taxable on receipt basis as provided under the DTAA. Therefore, what is not received from India has not been included in the total income. The assessee is not required to maintain India-accounts as it has no presence in India. It has followed cash system of accounting as in past. Therefore, it is argued that no addition can be made to the total income on the ground of discrepancies mentioned above. 3. In reply, the ld. senior DR submitted that two main questions are involved in this case-whether, reimbursement of expenses in respect of SAP licenses, RAS charges and traveling etc. are liable to be included in the receipts as royalties/FTS, and (ii) whether, royalty is taxable in the year of accrual or in the year of receipt? 3.1 He referred to page no. 5 of the return of income where it is mentioned that the assessee is liable to maintain accounts as per section 44AA, but is not lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses incurred for earning royalty/FTS, the principle of taxation on gross basis provided in Article 12 of the DTAA is violated. In this connection, references are made to page nos. 5 and 6 of the technical services agreement entered into between the assessee-company and the Indian subsidiary. Under the head "fees", it is provided that in consideration of performance of services by the assessee company under this agreement, the Indian subsidiary company agrees to pay all costs, plus a mark-up of 8%. However, under the scheme of taxation of royalty/FTS under the DTAA, the fee is taxable on gross basis. Therefore, the cost incurred on earning the fee cannot be passed on to the Indian company. Accordingly, it is argued that at least reimbursement of travelling expenses has to be included in the fees paid by the Indian company to the assessee-company for the purpose of taxation under Article 12 of the DTAA. 3.3 It is also submitted that there are some minor issues. Ground no. 5.1 is in respect of an amount of Rs. 41,369/-, which has been held to be taxable in the hands of the assessee. It was submitted before the ld. DRP that the amount represents loss incurred on account of fluct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has mentioned that the assessee has offered to tax all sums received from India as royalty/FTS. However, it has not offered certain sums for taxation in this year and not even till date. Some examples have been mentioned. It is also noted that the Indian subsidiary has claimed deduction in respect of certain amounts but the assessee-company has not offered such amounts for taxation. The ld. DRP has recorded a finding that the assessee is required to maintain accounts on mercantile basis as it is a company. The case of the ld. counsel is that the assessee is not required to maintain India-specific accounts as it has no PE in India. This submission is contrary to the representation made in the return of income that it is obliged to maintain accounts u/s 44AA. In this connection, we have already held that in so far as the provisions of the Act are concerned, the assessee is obliged to maintain India-specific accounts and to get them audited under sections 44AA and 44AB respectively. Being a company, the accounts are expected to be maintained on mercantile basis in so far as the provisions of Income Tax Act are read along side the provisions of the Companies Act. However, it is also th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573. The question before the Court was-whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that royalty amounts should be assessed on cash basis for assessment years 1967-68 to 1969-70 if the books and balance-sheet of such receipts are found to be maintained on cash basis and in directing fresh assessment on such basis? The court mentioned that it must be remembered that section 145 is only a machinery provision and it cannot control the charging section so as to make the latter otiose. Therefore, section 145(1) should not be permitted to apply in such circumstances as those which arise from the facts of the case. It is immaterial whether the assessee is keeping accounts on a regular basis by following cash method. Even in this situation he is liable to be assessed u/s 5(2)(b). To hold otherwise would be to take the income outside the purview of taxation under the Act, though such income had accrued in India to a non-resident. 6.4 After considering the facts of the case and precedents relied upon by the rival parties, we find that the ld. senior DR has primarily relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. senior DR has been able to make out a case that the expenditure has been incurred in connection with earning of royalty/FTS. It could be argued that the assessee-company should have charged reasonable margin from the Indian subsidiary. However, income, if any, would be in the nature of business income. The assessee does not have a PE in India. Therefore, such income is not liable to be taxed in India. Accordingly, it is held that reimbursements of SAP licence and RAS charges are not taxable in India. 7.1 However, the position of reimbursement of traveling expenses is quite different. These expenses have been incurred in connection with technical services agreement. Therefore, the expenditure has been incurred for earning royalty/FTS. In spite of the fact that the agreement provides inter-alia for adequate level of support and posting its personnel, the expenses for which will be reimbursed, the fact remains that the expenditure has been incurred for earning the royalty/FTS. The expenditure is that of the assessee and not that of the Indian subsidiary company. Article 12 provides for taxation of royalty/FTS in the source country on gross basis at a concessional rate of tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UAE, tax at source must be deducted as under:- 5% of the gross amount of dividends if the beneficial owner is a company which owns at least 10% of the shares of the company paying the dividends, and 15% of the gross amount of dividends in all other cases. The rates for tax deduction at source have also been mentioned in respect of payment of interest and royalties. The circular does not mention anything about surcharge. The case of the ld. counsel is that the assessee is required to pay tax prescribed under Article 12 and no surcharge is payable. 8.1 In reply, the ld. senior DR submits that the rates are prescribed under the Finance Act and not the Income-tax Act. Section 90(2) of the Act does not contemplate treaty override over the Finance Act. Therefore, the assessee is liable to pay surcharge. 8.2 We have considered the submissions of the rival parties. We find that circular no. 734 does not mention anything about surcharge for the purpose of deduction of tax at source from payments by way of dividends, interest and royalties. What is good for the TDS is also good for the taxation. Therefore, it is held that the assessee is not liable to pay surcharge. 9. The second quest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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